Chris Lombardi puts defense and security under the spotlight, as he shares his takes on recent NATO and EU cooperation and provides insight into the company’s own long-term strategic partnerships in Europe.

Three trends are currently driving the global electricity sector: decarbonization, decentralization and differentiation. Utilities are making significant contributions to mitigate carbon emissions, while a technology revolution is …

Latin lessons for Europe

Turning-points are easy to identify with hindsight, but not in real time. So the guarded optimism that Mario Draghi, the president of the European Central Bank, expressed last week (12 January) about signs of a stabilisation in eurozone economic growth and an easing of the sovereign-debt crisis should have come with a health warning.

That duly arrived the next day when the Greek government’s negotiations with private banks over a new bail-out plan broke down again and the credit rating agency Standard and Poor’s downgraded half the eurozone, including France. It was quickly followed by the downgrade of the eurozone’s bail-out fund, the European Financial Stability Facility (EFSF).

The downgrades put another question-mark over the future lending capacity of the eurozone’s bail-out mechanisms, the EFSF and the yet to be activated European Stability Mechanism. The sooner the International Monetary Fund (IMF) gets a clear mandate to raise new funds and deepen its involvement in the eurozone debt crisis – and this may not be far off – the better.

The brinkmanship between the government in Athens and investors in Greek bonds over a restructuring of the government’s debts will come as no surprise to eurozone officials with long memories of fraught sovereign- debt negotiations in Latin America in the 1980s.

In his magisterial study of the IMF in that era, James Boughton charts the progression of the region’s debt crisis from Mexico’s debt default in August 1982 and Brazil’s ‘moratorium’ on paying interest on foreign bank loans in February 1987, to Argentina’s collapse into hyperinflation in mid-1989.

Those tumultuous years, Latin America’s ‘lost decade’ (1979-89), saw gross domestic product per capita decline by almost 1% each year. It was not until 1988, six years after the Mexican default, that then US Treasury Secretary Nicholas Brady came up with a growth-focused recovery scheme, the complex Brady Plan. This securitised bank debts and granted credibly reforming Latin governments substantial debt relief and access to new money, exactly what Greece, which has still to make a convincing reform effort, needs today.

According to José Antonio Ocampo, at the time a senior United Nations official, the Brady Plan was vital to Latin America’s recovery in the 1990s.

In a paper last year, Guillermo Ortiz, a former finance minister and central- bank governor of Mexico, argued that three basic steps were critical to reviving the Latin economies. As well as the Brady Plan, these included IMF-monitored fiscal adjustment and privatisation of state-owned enterprises to bring government finances under control, and structural reforms to stimulate growth.

A more difficult recovery

No less important was the strong economic upswing in the neighbouring United States. In the early 1980s, many of the biggest US banks, and the US financial system, had been brought to the brink of catastrophe by their overexposure to stressed Latin American sovereign debt. By the end of the decade, the banks were healthy enough, in part because of profits generated in their much larger domestic market following a vigorous US economic recovery, to start writing off their Latin debts and grant borrowers there the easier terms that the Brady Plan proposed.

Global growth was important too. By the 1990s the world economy was entering a prolonged period of low inflationary economic expansion and rapid international economic integration – ‘globalisation’. This helped Mexico, a mere petro-state in 1982, and Brazil recover and develop into the diversified middle-income emerging market economies that they are today. Ocampo says that in the 1990s Latin America’s export volumes grew at 9% a year – “the fastest in history”.

Fast-forward to Europe today and the picture looks much worse. Many eurozone banks, which, as Draghi pointed out last week, account for some 80% of lending in their vital home market, have yet to recover from the financial crisis that began in 2007. They are in no shape to absorb sovereign-debt losses. Indeed, there are fears that they are ‘deleveraging’, cutting back their business, because of the losses they have already suffered. The eurozone economy is not enjoying a powerful economic recovery that could boost bank profits and large parts of the world economy are in trouble too.

This is a tough environment in which to implement much needed fiscal discipline and structural economic reforms. “Austerity in a slow-growing world is not an optimal policy,” says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former senior US government official who was at the heart of the Latin debt negotiations.

Moreover, what is also missing in Europe is the psychological boost that Ortiz says crisis-hit Latin American countries secured from the combination of domestic economic reform with international public and private-sector endorsement of their economic policies, not least by the IMF: Europe’s mishandling of the debt crisis, from the early weeks of 2010 as discussions about a Greek bail-out began, has undermined, rather than boosted, confidence.

To be fair, Europe has been in an odd situation. Eurozone leaders have, in effect, been trying to rewrite the European Union’s constitution to lay the foundations for a fiscal union with an existential crisis swirling about them. A key player in the negotiations has been the ECB. Perhaps for the first time in history, unelected officials in a central bank have had to play a dominant role in shaping a new constitutional settlement not just for a country, but a region.

Economic governance

As Draghi pointed out last week, time is not on the eurozone’s side. It would be better, he said, if this month’s EU summit came to decisive conclusions on eurozone economic governance, rather than delaying them until the European Council in March. It would be better if, alongside the EFSF, the European Stability Mechanism were up and running in weeks, not months.

It would also be much better if the IMF were given the go-ahead, even if the US votes against it, to raise money to play as big a role in Europe as it did in Latin America.

Deeper IMF involvement, in Italy for example, can provide not just expertise, finance and discipline. It could also reinforce, as it did in Latin America, the political credibility of the eurozone’s reform process and so get growth-enhancing funds flowing more freely through the eurozone’s stagnating economy.